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So, although the period ahead is going to be challenging, our public services are in a better state they have been for decades. However, we have to be realistic: the spending environment will be tough over the next few years. For as long as extraordinary uncertainties remain in the world economy, this is not a time for a spending review.
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We have already set out clear and firm departmental budgets for the next financial year, but to try to fix each Department's budget now for the next five years is neither necessary nor sensible. We can, however, set out a clear direction, based on our economic priorities and our values as a Government.

We are clear that, following the investment made over the past decade, current spending growth can be set lower than in the past and fall to an average of 0.8 per cent. a year between 2011-12 and 2014-15. That will mean cuts to some budgets, as programmes come to an end or resources are switched, and it will mean that some programmes will need to be stopped altogether. We believe that if Departments can find further savings and cuts within their existing budgets, as many are already announcing, that will release resources so that they can continue to provide services. Already individual Departments have made great strides in finding savings-£10 billion in the NHS, £800 million in education and more than £400 million in the police-but even in this much tighter financial environment we are determined to protect front-line services and sustain the improvements that have been delivered over the past decade. The pre-Budget report sets out our plan to do that while halving the deficit.

First, we must make sure that we get maximum value for every pound we spend. Between 2005 and 2008, we delivered £26.5 billion of annual efficiency savings, and between 2008 and 2011 we are delivering further efficiencies worth more than 3 per cent. of total departmental spending per year. This week, we announced plans to deliver another round of savings, amounting to £12 billion a year by 2013-14. We will abolish quangos, cut consultancy and marketing costs, improve procurement and streamline back-office functions. We will also sell those assets that can be managed better by the private sector.

Secondly, we need to focus better on those areas that make most difference to people's lives. We have begun a root-and-branch review to examine every area of Government spending to drive through efficiency, to cut waste and to cut lower priority budgets. Today, I am able to announce £5 billion of savings from spending programmes. This includes: phasing-in the roll-out of pension personal accounts; cutting back on the scope of major IT projects; reforming legal aid and outsourcing inefficient prisons; refocusing regeneration spending, so that it is spent where it is most needed; and cutting the cost of residential care by supporting older people to stay in their own homes. Those are necessary choices.

Thirdly, on public sector pay and pensions, public pensions need to be broadly in line with those offered in the private sector. So, by 2012 contributions by the state to public sector pensions for teachers, local government, the NHS and the civil service will be capped, saving about £1 billion a year. Public sector workers will make a greater contribution to the increasing value of pensions, with those earning more than £100,000 paying more. Public sector pay makes up about half of departmental spending. The senior civil service will take the lead with a cut in its pay bill of up to £100 million over three years, and any new Government appointment of someone on more than £150,000 and all bonuses of more than £50,000 will require explicit approval by the Treasury. I can announce that for the two years from 2011 we will ensure that all public sector pay settlements are capped at 1 per cent. [Interruption.]

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Mr. Speaker: Order. I apologise for interrupting the Chancellor of the Exchequer. Mr. Bellingham, we have, on a regular basis, a running commentary from you, but the House does not need it and the country does not need it either.

Mr. Darling: As with previous pay decisions, we will recognise the special circumstances of the armed forces. There will be savings of £12 billion from greater efficiency, of £5 billion from scaling back or cutting lower priorities, and of more than £4.5 billion from reducing the cost of public sector pay and pensions. These are difficult choices, but they are essential if we are to stick to our plan to halve the deficit and protect the front line.

Our first priority today must be to ensure that our armed forces have all the resources they need. The whole House, especially this week, will want to join me in praising the dedication and valour of our troops, especially those engaged in the conflict in Afghanistan. They deserve all our support and we must match that support with resources. For the next year, I can announce that a further £2.5 billion will be set aside for military operations in Afghanistan. At the same time, we will continue to improve the effectiveness of core defence spending, reducing the civilian work force and restructuring the Department. I also want to do more to help those who have served in combat zones and are retiring from the forces, so I can announce that £5 million will be allocated from the strategic investment fund to help ex-service personnel who want to set up their own businesses.

In 2005, we led the way towards abolishing the debts of the poorest countries, and we have committed to doing more in the fight against global poverty. Spending on overseas aid remains a very small proportion of our overall budget, but it does make a huge difference to the lives of millions of people, as well as creating a fairer world, helping to build markets for our goods and countering extremism. I can confirm that we will honour our commitments, so spending on overseas aid will rise to 0.7 per cent of gross national income by 2013.

Our priority is to protect those services that are absolutely essential to the health of our society and the strength of our economy: the health service, which is crucial for our well-being; the police force, which is crucial for our safety; and our schools, which are crucial for our future. I am determined that we will protect improvements in those front-line services, on which millions of people rely. That cannot be done without a further difficult decision. I intend to increase all employer, employee and self-employed rates of national insurance by a further half pence from April 2011. But to protect those on modest incomes, I have also decided to raise the starting point from which national insurance is payable, and no-one earning less than £20,000 will pay more contributions as a result. This will raise £3 billion a year from 2011-12.

As a result, I am today able to offer guaranteed minimum real-terms increases in front-line NHS and schools spending for two years from 2011, as well as providing sufficient funding to maintain the number of police and community support officers. That means that I can confirm not just that we will increase spending as planned next year on hospitals, schools and policing, but we can pledge that spending on these crucial front-line services will continue to rise over and above inflation
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after 2010-11, so that we can meet the improved public service guarantees and entitlements that we have set out. There will of course be Barnett consequentials for Scotland, Wales and Northern Ireland.

I have one further announcement to make: because of my decisions today, I am able to extend free school meals to 500,000 primary school children of low-income working parents who previously would not have been eligible. Once that is fully rolled out, it will lift an additional 50,000 children out of relative poverty and will be a step towards our target of abolishing child poverty by 2020.

The decisions the Government have made have helped support businesses and families through the deepest global recession for more than 60 years. These are decisions that have been followed across the world but, of course, have been opposed by some here. The steps that I have announced today are aimed at securing recovery, reducing borrowing and, through targeted investment, providing a springboard for long-term growth. The choice facing the country is between securing recovery and wrecking it; between investment to build a fair society where all prosper or a divided society that favours the wealthy few; and between ambition driven by the values of fairness and opportunity or austerity driven by an outdated dogma. I commend this statement to the House.

Mr. George Osborne (Tatton) (Con): Today, confronted with the biggest budget deficit in our peacetime history, the right hon. Gentleman faced a choice: would he take the tough spending decisions before the general election or would he completely duck them? We were promised a pre-Budget report and what we got was a pre-election report. The Government have today lost all the moral authority to govern. Instead, the full scale of the economic disaster that Labour has visited on this country is clear to us all: the biggest debt we have ever known; spending cut on almost everything; taxes up on anyone who earns more than £20,000 a year; Labour's new tax on jobs; and higher interest rates to pay for the higher borrowing. Every family in the country will be forced to pay for years for this Prime Minister's mistakes. At the end of their period in office, they have indeed adhered to the greatest of golden rules: "Never trust a Labour Government with your money again."

Everything that the Government have told us on the economy collapses in the face of the truth. They told us that they would be prudent, and the figures that they have produced have shown us that Labour has quadrupled the national debt while in office. They told us that Britain was better prepared than other countries, and now our budget deficit is higher than that of any other comparable country anywhere else in the world. They specifically told us-this Prime Minister told us-that Britain would lead the world out of recession, and now the rest of the world leaves Britain behind as it recovers.

We are the only G20 economy in recession, and that Prime Minister used to stand at the Dispatch Box on occasions like this and say that he had rewritten the laws of economics, that he had abolished the trade cycle, and that he had abolished boom and bust. The numbers that the Chancellor has given us confirm that this Prime Minister inflicted on us the
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deepest and longest recession in our modern history. No one will ever believe a word they say on the economy again.

Faced with this catastrophe, the Chancellor had three tasks today: first, to restore confidence in the Treasury forecasts; secondly, to produce at last-we hoped-a credible plan to deal with Britain's record debts; and finally, to show the world that Britain is open for business again and can create jobs. He failed on all three accounts.

First, the forecasts. Every single time this Chancellor has come to this House, he has got his forecasts wrong, and today was no different. He confirmed that the GDP figures for this year show a contraction of 4.75 per cent. That is not only a full percentage point worse than the figure in the Budget-it is almost four times worse than when he delivered the last pre-Budget report. I noticed in his speech a little sleight of hand. He gave the annual contraction figure for the UK and the total contraction figure for every other country. The total contraction figure for the UK is 5.9 per cent., the worst since the 1930s.

It would be difficult to imagine that this year's forecast for borrowing would be an underestimate, but so it turned out to be. I am told that they are having a row in Downing street: the Prime Minister wants to get his forecasts wrong on purpose, while the Chancellor prefers to get them wrong by accident. Either way, Britain is borrowing £178 billion this year and £176 billion next year. This is a figure that he did not give: £789 billion of additional borrowing over the next six years, and that is based on some pretty heroic growth assumptions in future years. Of course, a sneaky fiddling of the definition of the structural deficit was buried in the report. It all amounts to the fact that he is doubling the national debt from where it is today to £1.4 trillion-£23,000 for every child born today.

Without a hint of irony or contrition, the Chancellor publishes today what is farcically called a Fiscal Responsibility Bill-as if we needed a law to tell us that their irresponsibility has been criminal. This is what one of the Prime Minister's own appointments to the Monetary Policy Committee has just said about their law:

The Chancellor should have introduced our plan for a proper, independent office for budget responsibility that will keep the Chancellor honest and ensure that never again can a Government fail to fix the roof when the sun is shining.

So, the Chancellor has not restored confidence in Treasury forecasts. That was his first task. His second was to set out a credible plan to deal with the debt crisis. Yesterday, as he well knows, another credit rating agency warned that that the UK was at risk of a downgrade. Even this morning, the deputy leader of the Labour party was admitting on television that markets are getting more nervous than they were about Government borrowing. The Governor of the Bank of England says that we must

over the lifetime of this Parliament. I agree with the man in charge of monetary policy in this country. Yet today the Chancellor is sticking with the same plan that he set out in the Budget-the plan that the Bank of
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England, the CBI and the OECD have all told him is not credible. The whole object of policy going forward as we come into recovery is to keep interest rates as low as possible for as long as possible. That is not what his recipe provides today.

As the debts have become bigger, so the Government's response gets smaller. What the Chancellor had to say to the House today on spending is just not credible. He promises more efficiency savings, but coming from the people who have just admitted that they wasted £4 billion on an NHS computer system, that rings a little hollow. As for the waste advisers who wrote those reports that the Chancellor is publishing today, they have lived up to their names by deciding that they will not waste any more time with him: they are working with us.

Then there are the proposals on bankers. We warned the Chancellor two months ago that he should try to stop big cash bonuses being paid out. I said in my conference speech that we should look at the tax system. Let us be clear: the Government are going to pay out a load of bankers' bonuses that they should not have been paying out in the first place, then put a one-year windfall tax on them and declare it a triumph. The real test of this new tax will be whether it curbs bank bonuses instead of curbing bank lending. Let us hope that it is more effective than those binding lending agreements that we once heard so much about at that Dispatch Box.

The Government say that they will use the money on youth unemployment, because instead of abolishing it, as promised, the Prime Minister has led youth unemployment to a record high. We need a real, lasting plan to get Britain working and to deal not just with the million or more people who have lost their job under Labour, but the millions more who have never had a job under Labour.

On spending, the Chancellor is prepared to tell us what he will spend money on, but he stays almost totally silent on where the real axe will fall. He is achieving the previously impossible trick of ring-fencing a black hole. He said, with understatement, that this is not the time for a comprehensive spending review. This is from a Chancellor who said that that he was acting from a position of strength! Why is it not the time for a comprehensive spending review? The Government have all the figures and they have access to all the information that they need. They had spending reviews just before the 2001 election and just before the 2005 election. Now, suddenly, the spending review has to wait until after the 2010 election. That spending review is the massive missing piece of this pre-Budget report. They have given us lavish detail on the few things that they say that they are protecting, and almost nothing on the many things that they are planning to cut. They are not being honest with the British people about the real price of their incompetence. This has got nothing to do with protecting front-line services and everything to do with protecting themselves. What we see today is not a credible plan on the debt, and the Chancellor has failed his second task.

The Chancellor's final task was to set out a real plan for growth. What does he propose? A higher tax on jobs. That is his answer to Britain's unemployment problem-higher costs for struggling businesses and more money taken from families. That is yet another thing that we could have avoided if this Government had taken the hard decisions in the good years.

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Let me just say this about some of the tax measures that the Chancellor has announced in the Budget, the last pre-Budget report and this pre-Budget report. The message to aspiring families from these tax changes is pretty clear: if you want to get on in life, if you want to own your own home, save for a pension or leave something for your children, then the Labour party is not for you anymore. All that work Labour did to drag the party on to the centre ground of British politics, as well as all the effort it made to persuade the country that it was for enterprise and aspiration, is gone. Instead, it has erected a sign over the country that says, "Closed to enterprise and wealth creation," all for the sake of narrow political dividing lines. Instead of telling the country that we are all in this together, Labour now pretends that it can solve our problems by setting one part of the country against another. At the next election, it will be the few who support this approach and the many who reject it.

Instead of a plan for growth and jobs, the Chancellor's plan means higher taxes, higher taxes on jobs, higher interest rates and turning his back on aspiration and enterprise. His third and final task-failed. There is no confidence, no credible plan, no growth and aspiration is being abandoned.

Why is it that every Labour Government have taken this country to the brink of bankruptcy? Each one in turn seems to ignore the most basic rule of finance: if you keep on spending more than you earn, sooner or later you run out of money. How difficult can it be for them to remember this simple point? The country now faces a choice. There is Labour's route, which has been set out for us today: higher debts leading to higher taxes and higher interest rates; the recovery choked off; and Britain reduced again to being the sick man of Europe. Or people can choose our route, which is to face up to the problem; set out to eliminate a large part of the deficit in the Parliament for which we are accountable; expect everyone to share the burden, but protect the lowest paid; keep interest rates lower for longer; send the message out loud and clear that Britain is open for business; and transform the economy that Labour built on debt into one in which we save and invest for our future. That is not going to happen under this Government.

The Prime Minister- [ Interruption. ]

Mr. Speaker: Order. I apologise for interrupting the shadow Chancellor. Mr. Prentice, you must calm down. You might have an opportunity later, but you must calm down now.

Mr. Osborne: The Prime Minister always called himself the nation's bank manager, and so he has been. He bet the nation's finances on a never-ending property bubble and a City bonanza, and now, like every other failed master of the universe, he is coming to the taxpayer and asking to be bailed out, but he should remember this: most bail-outs start with a change at the top.

Mr. Darling: I have listened to the shadow Chancellor speak for the past 10 minutes or so, and there is one word that he did not mention-one word that he finds quite impossible to let pass his lips: "growth". Not once did he mention the possibility of achieving growth. He did not mention it in his conference speech, and he did not mention it today, because it is the one thing that the Conservative party seems quite incapable of realising-that we must secure long-term sustainable growth in this country. The alternative that he offered- [ Interruption. ]

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Mr. Speaker: Order. I am sorry to have to interrupt the Chancellor of the Exchequer. I must say, Mr. Blunt, that this constant heckling is not impressive to the people of this country. It conveys a very bad impression of the House. Stop it.

Mr. Darling: Growth is absolutely essential for our long-term future. The hon. Gentleman also barely mentioned unemployment and the need to take measures to get unemployment down. He did not say whether or not he supports the measures that I have put before the House today to get people back into jobs and to make sure that people do not find that a short spell on benefit ends up being a lifetime in long-term unemployment. He did not say where he stands on our priorities of ensuring that we protect the front-line NHS, ensuring that we have got schools for the future and making sure that we have got enough policemen on the beat. He says absolutely nothing about that.

Fundamentally, yes there is a big issue before us. Because of this downturn, we, like every other country in the world, face much higher borrowing than we would like. It has resulted in debt increases, but the question is this: at what rate and how quickly do we reduce that borrowing and debt, and how do we do that? Perhaps the hon. Gentleman should have a word with the Leader of the Opposition, who seems to be talking to himself just now. On Sunday, when the Leader of the Opposition was speaking to the BBC and was asked about our proposals to reduce the debt, he said:

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